The Innovator's Solution

In the retail revolution, Wal-Mart first brought low-cost goods to the shelf. Amazon then brought low-cost goods—and the shelf—to the consumer's home, via low-cost fast service times.

In our last blog, we discussed how Amazon’s low-cost service times, and the pressure that places on supply chains. Today’s blog analyzes how to compete in this multichannel environment that requires serving the customer in ways that remove the barriers that make consumers think twice about making the purchase. Supply chains inventory pools must be positioned to fulfill a wide item assortment that is customer behavior agnostic, accommodating both e-commerce or brick-and-mortar purchases.

As a result, retail supply chains have to be extremely dynamic and flexible, operating at a high frequency. They must provide customers with multiple delivery collection and delivery options. They must be able to drive fulfillment through distributed order management that defines sourcing and fulfillment policies and logic, as well as make high-frequency, inter-depot transfers across channels to balance inventories as demand evolves dynamically.

They also have to improve fulfillment, which has become a key component of customer experience. This includes dealing with the increase in returns that come with online ordering. They have to support trials, tests, and rollouts of new consumer shopping services. And they must monitor themselves—to recognize what doesn’t work, and rapidly move on.

The above requires changing the culture of the organization and the operational fulfilment model from product-centric to customer-centric. Disruption caused by consumers' desires for new methods of shopping and returns may be the beginning of continual disruption. Future supply chains may be routed for time-phased flexibility, rather than for stability.

Typically, developing the agility to support an integrated, omni-channel strategy requires investment in distribution and fulfillment center automation. But Bob Ferrari, in a Supply Chain Matters research advisory, cautions that focusing exclusively on this approach can be “one-dimensional.” So he emphasizes the need to deploy strong supply chain planning, advanced analytics and inventory optimization tools to power a retail supply chain that can compete with the Amazon juggernaut.

Ferrari advocates “much more sophisticated inventory management” that leverages “sophisticated fulfillment algorithms, supported by advanced forms of predictive and prescriptive analytics, to support decision-making.” And Gartner reports that more than half of supply chain executives say they are increasing their investment in analytics and smarter algorithms.

These tools disaggregate forecasts down to the stockkeeping unit level. Combined with POS store data and online sales updates, they predict what stock needs to be in the store for on-site customers and in a distribution center for online shoppers. They allocate demand to the serving point in real time to calculate margin prior to order fulfillment. After fulfillment they refresh stock, re-balancing inventory frequently across multiple points of service to satisfy the shifting demand. The inventory optimization is powered by real-time algorithms that analyze daily demand to generate the in-store or DC inventory buffers, calculating the optimal service point.

Advanced analytics like pattern recognition, predictive algorithms, and machine learning are also helpful. Machine learning, for example, helps adjust the baseline demand forecast by identifying the effect of demand indicators at a detailed channel level. It “decodes” the data streams, analyzing variables and their complex interactions and patterns in an automated fashion.

Click below to read about one Internet Retailer is is succeeding in this environment.